Consumer Watch: Getting out of subprime lending territory

Refinancing a high interest rate loan only works if you have been bettering your credit report (KOKH).

From time to time people may consider taking out a high interest rate loan, but that can cause more financial problems, especially if you don’t have a plan to pay that loan off quickly. If you're taking out a loan for a large purchase, you'll want to know more than the interest rate; check for the APR, or

the Annual Percentage Rate, because it includes your interest, plus any other fees attached to the loan. This will give you a look at all the extra you’ll have to pay for the privilege to borrow the money.

Items that affect interest rates:

Your credit score

Payment history

Debt to income ratio

The loan amount

"If you are going to use the loan to pay off credit card debt, that is an unsecured loan, so the bank is going to be a little more leery, and they are going to want to charge you a little bit higher interest rate because it is unsecured,” says Justin Cupler, savings expert with The Penny Hoarder.

If there is collateral or you leave a down payment for a car or a house, that improves the terms of the loan.

If you only qualify for a subprime loan, be sure to ask the lender why that is.

“Once you figure that out, just work on those bits-- whatever the bank said you need to work on, and watch your credit score tick up, until you hit the point where your bank says you are ok, and then you can refinance the loan, and hopefully get into a prime loan and drop that interest rate way down,” says Cupler.

Cupler also says the easiest way to avoid paying too much in interest is to not accept the loan, and delay the purchase until your credit is better or until you can pay cash. If you cannot avoid the loan, then he recommends paying more than the minimum every month, and be sure you are putting the extra cash straight toward the principal.

It is difficult to say how quickly it will be to move from subprime to prime lending possibilities. It depends on the person. For example, if your credit score is very low and you have many accounts in collections it may take longer than for someone with less negative marks on their credit report.

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